Income Taxes

On December 22, 2017 the U.S. government enacted comprehensive tax reform commonly referred to as the Tax Cuts and Jobs Act (“TCJA”). Under FASB Accounting Standards Codification (“ASC 740”), the effects of changes in tax rates and laws are recognized in the period which the new legislation is enacted. The TCJA makes broad and complex changes to the U.S. tax code, including, but not limited to: (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017; (3) bonus depreciation that will allow for full expensing of qualified property; (4) creating a new limitation on deductible interest expense; (5) eliminating the corporate alternative minimum tax ("AMT"); (6) limitation on the deductibility of executive compensation under Internal Revenue Code §162(m); and (7) new tax rules related to foreign operations.

On December 22, the SEC staff issued Staff Accounting Bulletin (“SAB”) No. 118, which provides guidance on accounting for the tax effects of TCJA. The purpose of SAB No. 118 was to address any uncertainty or diversity of view in applying ASC Topic 740, Income Taxes in the reporting period in which the TCJA was enacted. SAB No. 118 addresses situations where the accounting is incomplete for certain income tax effects of the TJCA upon issuance of a company’s financial statements for the reporting period that includes the enactment date. SAB No. 118 allows for a provisional amount to be recorded if it is a reasonable estimate of the impact of the TCJA. Additionally, SAB No. 118 allows for a measurement period to finalize the impacts of the TCJA, not to extend beyond one year from the date of enactment.

In connection with the initial analysis of the impact of the TCJA, the Company has recorded a provisional decrease in our deferred tax assets and liabilities with a corresponding adjustment to its valuation allowance. While the Company is able to make a reasonable estimate of the impact of the reduction in the corporate rate, it is subject to further analysis, interpretation and clarification of the TCJA, which could result in changes to this estimate during 2018.

Income (loss) from continuing operations before income taxes include the following components (in thousands):



	Years Ended December 31,
	2017			2016
U.S.-based operations	$	(5,715	)	$	(17,344	)
Non U.S.-based operations	517			(7,088		)
	$	(5,198	)	$	(24,432	)

Income tax expense (benefit) attributable to loss from continuing operations is summarized as follows (in thousands):



	Current			Deferred			Total
Year ended December 31, 2017:
State and local	$	53		$	—		$	53
Foreign	128			(96		)	32
Total	$	181		$	(96	)	$	85
Year ended December 31, 2016:
U.S. Federal	$	—		$	—		$	—
State and local	22			—			22
Foreign	(210		)	(770		)	(980		)
Total	$	(188	)	$	(770	)	$	(958	)

Income taxes attributable to loss from continuing operations differ from the amounts computed by applying the U.S. federal statutory rate of 34% to loss from continuing operations before income taxes as shown below (in thousands):



	Years Ended December 31,
	2017			2016
Expected tax benefit	$	(1,766	)	$	(8,307	)
Net tax effects of:
Foreign tax rate differential	(77		)	1,331
State taxes, net of federal benefit	(362		)	219
Return to provision adjustment	(48		)	13,386
Research and other credits	2,719			443
Permanent difference on convertible notes and warrants	(169		)	2,923
Goodwill impairment	—			533
Other	86			61
Change in deferred tax asset valuation allowance	(298		)	(11,547		)
	$	85		$	(958	)

Deferred tax assets and liabilities consist of the following (in thousands):



	December 31,
	2017			2016
Deferred tax assets:
Research and development credits	$	2,486		$	2,063
Operating loss carry forwards	7,085			7,320
Interest	315			460
Inventories	240			289
Allowance for doubtful accounts	88			129
Depreciation	316			353
Non-cash compensation	739			946
Other	533			929
Total gross deferred tax assets	11,802			12,489
Valuation allowance	(10,874		)	(11,441		)
Net deferred tax assets	$	928		$	1,048
Deferred tax liabilities:
Other identifiable intangible assets	$	(284	)	$	(494	)
Total gross deferred tax liabilities	(284		)	(494		)
Net deferred tax assets	$	644		$	554

The Company had approximately $19.8 million and $17.6 million of federal and state income tax net operating loss carryforwards at December 31, 2017, respectively. The foreign net operating losses can be carried forward indefinitely. Future utilization of the federal and state net operating losses and credit carryforwards is subject to a substantial annual limitation due to ownership change limitations as required by Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the "Code"), as well as similar state limitations.

In connection with the settlement of the Kanis S.A. debt exchange (see Note 11), a change in control of the Company occurred with Kanis S.A. becoming the largest owner of the Company's common stock in an amount greater than 50% of the issued and outstanding shares of common stock. As a result, the Company performed a study to evaluate the status of net operating loss carryforwards as a result of the ownership change during the year. The results of the study provided that there was indeed an “ownership change” as of August 30, 2016 as defined for U.S. federal income tax purposes. The "ownership change" will significantly limit the use of the Company's net operating losses and credits in future tax years

Of the $19.8 million federal loss carryforwards approximately $4.9 million of the loss will be subject to an annual limitation of $0.4 million within the next 5 years and $0.2 million for the next 15 years. The federal net operating loss carryforwards will expire in fiscal year 2037. As a result of the "ownership change" the federal research and development credits have been limited and based on the limitation the Company does not anticipate being able to use any of these credits that existed as of the date of the Merger in future tax years. Of the $17.6 million of state net operating loss carryforwards approximately $1.4 million of the loss will be subject to an annual limitation of $0.1 million for the next 20 years. The state net operating loss carryforwards will expire in fiscal year 2037. The Company has state research and development credits of $3.9 million however they have placed a 20% reserve on the credit since a thorough R&D study was not performed. Since the state credits have an indefinite life, the Company did not write them off even though it is also limited under Section 383. The Company has a full valuation allowance against the related deferred tax assets for its U.S. and U.K. entities as it is more likely than not that they will not be realized by the Company.

In assessing the potential realization of deferred tax assets, consideration is given to whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the Company attaining future taxable income during the periods in which those temporary differences become deductible. In addition, the utilization of net operating loss carryforwards may be limited due to restrictions imposed under applicable federal and state tax laws due to a change in ownership. Based upon the level of historical operating losses and future projections, management believes it is more likely than not that the Company will not realize the deferred tax assets.

The Company has not recognized a deferred tax liability on undistributed earnings of its foreign subsidiaries, because these earnings are intended to be permanently reinvested. The amount of the unrecognized deferred tax liability depends on judgment required to analyze the withholding tax due, the applicable tax law and factual circumstances in effect at the time of any such distributions. Therefore, the Company believes it is not practicable at this time to reliably determine the amount of unrecognized deferred tax liability related to its undistributed earnings; however, these undistributed earnings are immaterial. If circumstances change and it becomes apparent that some or all of the undistributed earnings of a subsidiary will be remitted and income taxes have not been recognized by the parent entity, the parent entity shall accrue as an expense of the current period income taxes attributable to that remittance.

The following changes occurred in the amount of unrecognized tax benefits including related interest and penalties, included in the income taxes payable on the consolidated balance sheet (in thousands):



	Years Ended December 31,
	2017		2016
Balance at beginning of year	$	1,469	$	634
Additions for current year tax provisions	51		49
Additions/Reduction for tax positions of prior years	—		786
Reduction for prior year tax provisions	—		—
Balance at end of year	$	1,520	$	1,469

If recognized, the entire amount of the unrecognized tax benefits would affect the effective tax rate. As of December 31, 2017 and 2016, the Company had $0.2 million and $0.2 million, respectively, accrued for payment of interest and penalties related to unrecognized tax benefits.

The Company operates in multiple tax jurisdictions, both within and outside of the United States. Although the timing of the resolution and/or closure of audits is not certain, the Company does not believe it is reasonably possible that its unrecognized tax benefits would materially change in the next twelve months. The following tax years remain open to examination by the major domestic taxing jurisdictions to which it is subject:



	Open Tax Years
United States—Federal	2014 - 2017
United States—State	2013 - 2017
Canada	2012 - 2017
Sweden	2015 - 2017
United Kingdom	2013 - 2017